Municipal bonds market gains serious impetus - Pancevo, Uzice ready for investors

After Novi Sad, which was the first to break the ice and issue municipal bonds in Serbia, it is almost for certain that at least another two cities will issue their bonds by the year's end.

Namely, the city of Uzice will soon decide whether to take out a loan or issue bonds in order to collect money to finance part of the city swimming pool construction project.

As people of the Standing Conference of Towns and Municipalities (SCTM) confirmed, the city of Uzice plans to issue municipal bonds worth EUR 1 million in early November in order to provide enough money to finance certain capital investments, the first of which is the completion of an indoor city swimming pool.

Uzice Mayor Jovan Markovic stressed when presenting that town at the SCTM that the inflow of liquid funds that can be earmarked in the city budget for large infrastructure projects was small so that the city was forced to provide such funds in other ways, one of which was to issue municipal bonds.

As Markovic explained, the construction of a city swimming pool that Uzice has been lacking for decades has finally started, and the proceeds from the issued municipal bonds would enable it to be finished until May or June 2012. The total value of the project is RSD 400 million, part of which will be provided by the city and the Ministry of Youth and Sports.

On that occasion, Aleksandar Bucic, SCTM's assistant secretary general for finance, pointed out that it was high time for local self-governments in Serbia to start using what towns and municipalities in surrounding countries had been using for many years by issuing municipal bonds.

According to his words, a good example is Croatia as well as the town of Rijeka, which obtained the funds to finance a swimming pool complex in the most favorable way possible.

- The interest of investors is huge because, after the state, local self-governments bear the least investment risk, and I think that investors - banks, pension funds, insurance companies - are right to find local self-governments as the least risky destinations for their investments - Bucic stressed.

(swimming pool in Uzice)

He underlined that Uzice considered both taking out a loan and issuing municipal bonds, but that they were pretty sure, having learned from Novi Sad's experience, that the terms of bonds would be much more favorable than the loan terms, and that "early November is the time when Uzice will be able to issue bonds."

Bucic stressed that the preparations for the issue of municipal bonds had cost those cities nothing because there were certain EU projects implemented through SCTM, giving both expert and technical support to the issuing of bonds.

The adviser to Novi Sad and Uzice in the implementation of this procedure is the consulting company WM Equity Partners, which is hired as part of the project SME IPA 2007.

Vladimir Pavlovic, director of that company, believes that it is important for investors that the city budget of Uzice is among the safest in Serbia since its main characteristic is the balance of revenues and expenditures.

- Considering that Uzice does not belong to any of the most developed regions and that it has not had too much income from building permits and other tax obligations, investments in this city are expected to grow so that the issue of municipal bonds can be increased in the foreseeable time, that is, it may exceed EUR 5 million, meaning that the bonds could also be acquired by investors other than banks and insurance companies - said Pavlovic.

Chance for pension funds soon

Municipal bonds are mainly interesting to local insurance companies and pension funds, which currently do not have many investment alternatives with decent rates of return, good liquidity and acceptable risk to choose from.

However, since the current Capital Market Law stipulates that pension funds can invest in bonds only if the issued bonds are worth minimum EUR 5 million, eKapija learns that these funds will also get their chance until the year's end.

Water Sports Center in Pancevo

Namely, it is confirmed for our web portal that Pancevo will issue municipal bonds worth over EUR 5 million until the year's end in order to finance the construction of a Water Sports Center.

Election vs investment year

It is well known that one of obstacles to earlier issuance of city bonds is political uncertainty in our country. It has been unofficially confirmed to us that several municipalities placed an order for the design of a feasibility study for the issuance of bonds and that the deal was close to be concluded, but then the government changed and all projects were abandoned.

Since the next year is also an election year, we've asked Vladimir Draskovic of WM Equity Partners, who was also hired to advise Uzice, if now is the right moment for these local self-governments to issue their bonds?

- In Serbia, the election cycle is often in direct connection with the investment cycle. However, the right moment for issuing the bonds depends on projects. Construction of a swimming pool in Uzice is underway, the project is in its late phase, and the lack of funds is a problem that can be solved with the issuance of bonds, which is why there was no time to waste – says Draskovic.

On the other hand, construction of a Water Sports Center in Pancevo is a long-term project, it will take several years to complete the works, so that Draskovic hopes that politics will not have a crucial influence in that case.

As eKapija learns, negotiations on the project funding through the issuance of municipal bonds are also underway with several other local self-governments, but these bonds are more likely to be issued early next year.

J.Đ.